Deck 6: Short-Term Financing Decisions

Question 1

All but which of the following would affect dividend policy?

A) contractual restrictions
B) a firm's need for funds
C) prospectus restrictions
D) stockholders' expectations

Answer 1

prospectus restrictions

Question 2

Your stockholders are primarily "yuppie"investors working towards profitable retirement and they are in high tax brackets. Which of the following dividend policies might cause your stockholders to sell their stock holdings?

A) Capital gains tax is lowered.
B) Income tax rate on regular income is increased.
C) Your dividend payout ratio is increased.
D) Your dividend payout ratio is decreased.

Answer 2

Your dividend payout ratio is increased.

Question 3

The net profits' rule prohibits dividend payments if:

A) they reduce the cash balance in the company so that they can only be paid with borrowed funds.
B) they would make the company insolvent.
C) they would create negative retained earnings on the balance sheet.
D) they would cause the current ratio to fall below the minimum level required.

Answer 3

they would create negative retained earnings on the balance sheet.

Question 4

Net income is $55,000, dividends paid are $8,000; what is the dividend payout ratio?

A) 0.0688%
B) 6.88%
C) 14.55%
D) 0.145%

Question 5

An erratic dividend policy would normally cause the stock price to:

A) decrease.
B) destabilize.
C) increase.
D) stabilize at a flat price.

Question 6

Dividends are paid with:

A) cash.
B) capital surplus.
C) capital.
D) current assets.

Question 7

Dividends on common stock are:

A) declared by a majority voting rule.
B) decided by the board of directors.
C) declared using the cumulative voting rule.
D) declared by the CEO.

Question 8

The declaration date is the:

A) date of trading ex- dividend.
B) date of record.
C) date the forthcoming dividend is announced.
D) cutoff date.

Question 9

Date of record is:

A) also referred to as the declaration date.
B) the date stockholder records are checked to determine who will receive the forthcoming dividend.
C) set by the CEO.
D) the date ex- dividend trading begins.

Question 10

The date of record is Wednesday, June 10. The ex- dividend trading would begin on:

A) Monday, June 8.
B) Monday, June 22.
C) Friday, June 5.
D) Friday, June 12.

Question 11

If the firm pays out dividends from whatever remains after capital budgeting financing requirements are satisfied, the firm is said to have a:

A) residual dividend policy.
B) signaling dividend policy.
C) clientele dividend policy.
D) continuous growth dividend policy.

Question 12

If the board is optimistic about the firm's future and declares a dividend larger than anticipated, this policy could best be described as:

A) a bird- in- the- hand dividend policy.
B) signaling dividend policy.
C) continuous growth dividend policy.
D) clientele dividend policy.

Question 13

The Modigliani and Miller dividend theory argues:

A) that the value of the firm is determined by income produced from assets and reinvested in the firm.
B) that the value of the firm is determined by income produced from assets.
C) that the value of the firm is determined by income produced from assets and paid in dividends.
D) that most investors want dividends reinvested into the firm.

Question 14

Stockholders first learn the amount of their next dividend on:

A) the ex- dividend date.
B) the declaration date.
C) the record date.
D) the cutoff date.

Question 15

The firm becomes legally obligated to pay a dividend:

A) on the ex- dividend date.
B) when declared by the CEO.
C) on the record date.
D) when the board decides to pay a dividend and declares it.

Question 16

A firm with a consistently high dividend payout will be less likely to attract investors:

A) who are older and on limited incomes.
B) in a lower income tax bracket.
C) in a high income tax bracket.
D) who do not need dividends to supplement other income.

Question 17

You own 200 shares of Easy stock that has a current market price of $25/share. What is the expected value of your holdings immediately after a 15% stock dividend?

A) $5,000
B) $5,500
C) $5,750
D) $5,375

Question 18

Any individual will receive the declared dividend if his/her name appears as a shareholder on the:

A) payment date.
B) post- dividend date.
C) ex- dividend date.
D) record date.

Question 19

Your firm reported a net income of $500,000 and is planning to finance a new capital budgeting project of $350,000 requiring $250,000 equity. If the firm pursues the residual theory of dividends policy, what is the amount of the dividend to be declared?

A) 0
B) $250,000
C) $150,000
D) $500,000

Question 20

A contractual restriction regarding a firm's payment of cash dividends:

A) is often a feature of a bond indenture.
B) is never found in a bond indenture.
C) is usually found in the prospectus.
D) is highly unusual.

Question 21

Use the following information to answer the question below.


-Calculate the Retained Earnings after the stock dividend is paid.

A) $1,600,000
B) $1,820,000
C) $600,000
D) $1,180,000

Question 22

Use the following information to answer the question below.


-Calculate the value of the common stock after the the stock dividend is paid.

A) $400,000
B) $1,200,000
C) $1,400,000
D) $1,000,000

Question 23

A commonly accepted reason why a firm might do a stock split would be to:

A) increase the price per share of the firm's stock.
B) increase the number of shares outstanding.
C) bring the firm's stock into a more affordable trading range.
D) give stockholders extra income.

Question 24

Use the following information to answer the question below.


-Calculate Retained Earnings.

A) $1,500,000
B) $2,400,000
C) $2,000,000
D) $1,600,000

Question 25

Use the following information to answer the question below.


-Calculate value of common:

A) $600,000
B) $1,300,000
C) $1,000,000
D) $900,000

Question 26

After a stock dividend , all else equal, the total market value of all the firm's stock will most likely (in the absence of other factors):

A) decrease.
B) remain unchanged.
C) increase immediately after the announcement, then decrease.
D) increase.

Question 27

If your stockholders are primarily very wealthy, which of the following dividend policies would be best for your firm:

A) a fluctuating dividend policy with low payout ratio.
B) a steady dividend policy with a high payout ratio.
C) a steady dividend policy with a low payout ratio.
D) a fluctuating dividend policy with steady payout ratio.

Question 28

Your firm's dividend payout ratio is 5%; dividends paid were $50,000; calculate net income.

A) $52,500
B) $500,000
C) $1,500,000
D) $1,000,000

Question 29

A liability for dividends is created on the firm's balance sheet on the:

A) declaration date.
B) cut- off date.
C) date of record.
D) ex- dividends trading date.

Question 30

Your firm's dividend payout ratio is 6%; dividends paid were $150,000; calculate net income.

A) $2,000,000
B) $500,000
C) $2,500,000
D) $159,000

Question 31

Net income is $100,000, dividends paid are $20,000; what is the dividend payout ratio?

A) 25%
B) 5%
C) 0.5%
D) 20%

Question 32

A company announces that it will double its current quarterly dividend and expects to raise dividends again next quarter. This is an example of:

A) residual dividend theory.
B) bird- in- the- hand dividend theory.
C) clientele dividend theory.
D) signaling dividend theory.

Question 33

Although a company is increasing net income annually, the company continues to reinvest all earnings. This is an example of:

A) signaling dividend theory.
B) consistent dividend theory.
C) bird- in- the- hand dividend theory.
D) clientele dividend theory.

Question 34

To maintain shareholders, a company pays some dividend every quarter, regardless of earnings. This is an example of:

A) signaling dividend theory.
B) residual dividend theory.
C) bird- in- the- hand dividend theory.
D) clientele dividend theory.

Question 35

A plan that allows shareholders to use their dividends to purchase additional shares of stock is called a:

A) dividend reinvestment plan.
B) dividend purchase plan.
C) employee stock option plan.
D) internal reinvestment option.

Question 36

A company begins a dividend reinvestment plan. 83% of shareholders enroll. Which of the following is false?

A) The clientele dividend theory does not hold.
B) The current dividend payment policy is less than optimal.
C) Shareholders support current managerial activities.
D) The reinvested dividends will be taxed as capital gains.

Question 37

A ________ keeps records of stockholder ownership for a corporation.

A) recording company
B) securities committee
C) equity agent
D) transfer agent

Question 38

Why do corporations split their stock?

A) To mollify institutional investors.
B) To increase the number of potential investors.
C) To diversify individual shareholder wealth.
D) To increase shareholder equity.

Question 39

Your firm has decided to pay a 15% stock dividend. The current market price of the stock is at $17/share. The following information is the balance sheet before the stock dividend was declared:
Show the equity section of the balance sheet after the stock dividend.

Question 40

A firm decides to do a 5- 1 stock split. The current market price of the stock is $20/share. The following information is the balance sheet before the stock dividend was declared:
Show the equity section of the balance sheet after the stock split.

Question 41

Net income is $2,500,000; dividends declared are $500,000. What is the dividend payout ratio?

Question 42

Why is it important for a firm to understand the makeup of its stockholders before it determines a dividend policy?

Question 43

Explain the difference between the declaration date, the date of record, and the ex- dividend trading date.

Question 44

Would it be a common practice for a high- growth firm to have a 100% dividend payout ratio? Explain.

Question 45

Why might a firm elect to pay a stock dividend instead of a cash dividend?

Question 46

Would a stock dividend increase the value of the firm? Explain.

Question 47

What is the rationale of managers who view a stock split as a way to increase the total value of their firm's stock?

Question 48

What is the M&M dividend theory? If their theory holds in the current economic environment, should a company pay dividends? Why or why not?

Question 49

What factors affect dividend policy?

Question 50

Firms have been shown to borrow funds to pay dividends. Why would a corporation do this?

Question 51

Working capital includes all but which of the following:

A) accounts payable.
B) accounts receivable.
C) prepaid expenses.
D) marketable securities.

Question 52

The level of net working capital is affected by all but which of the following:

A) notes payable.
B) retained earnings.
C) cash.
D) marketable securities.

Question 53

Net working capital equals:

A) temporary current assets - permanent current assets
B) current assets - current liabilities
C) total assets - total liabilities
D) total assets - (total liabilities + equity)

Question 54

Working capital is the amount of:

A) current liabilities.
B) LT debt.
C) cash and near- cash assets.
D) equity.

Question 55

A base level of inventory, cash, marketable securities, prepaid expenses, and accounts receivable is best described as:

A) permanent current assets.
B) fixed assets.
C) fluctuating assets.
D) permanent net working capital.

Question 56

The trade off of holding cash versus a high returning fixed asset is called:

A) liquidity versus profitability trade off.
B) profitability versus net working capital trade off.
C) liquidity versus permanent asset trade off.
D) the net working capital trade off.

Question 57

An optimal level of current assets is reached when:

A) cash, a non- earning asset, is minimized.
B) an optimal level of debt financing is achieved to fund current assets.
C) optimal levels of cash, inventory, and accounts receivable are achieved.
D) minimum levels of all current assets are maintained.

Question 58

With respect to debt financing, which of the following statements is most accurate from the perspective of the firm seeking funds?

A) Short- term loans are more risky and usually more expensive than equity.
B) Short- term loans are less risky and usually less expensive than equity.
C) Short- term loans are more risky and usually more expensive than long- term debt.
D) Short- term loans are more risky and usually less expensive than long- term loans.

Question 59

A firm that uses more short- term financing to finance most of its assets, all else equal, is:

A) using an aggressive approach.
B) using a combination approach.
C) using a conservative approach.
D) using a moderate approach.

Question 60

Which of the following financing approaches is the most aggressive financing approach?

A) financing temporary current assets, permanent current assets, and some long- term fixed assets with short- term debt
B) financing temporary current assets, permanent current assets, and long- term fixed assets with long- term debt and/or equity
C) financing temporary current assets with short- term debt, all other assets with long- term debt and/or equity
D) financing all assets with equity

Question 61

In which of the following situations would net working capital be negative?

A) Financing current assets with short- term debt, other assets with long- term debt and/or equity.
B) Financing all current assets and some fixed assets with short- term debt.
C) Financing all working capital with long- term debt.
D) It is not possible to have negative net working capital.

Question 62

An aggressive approach usually means:

A) lower levels of debt; higher levels of equity.
B) a lower cost of funds.
C) high levels of long- term financing.
D) higher interest rates paid.

Question 63

Which of the following would be the most conservative financing approach?

A) long- term debt and/or equity to finance fixed and current assets
B) short- term debt to finance current assets only
C) short- term debt to finance all assets
D) long- term debt and/or equity to finance fixed assets only

Question 64

A conservative financing approach usually means:

A) negative net working capital.
B) lower levels of equity.
C) a higher cost of funds.
D) lots of short- term debt.

Question 65

The maximum amount of net working capital possible is achieved using which of the following approaches?

A) ultra- conservative approach
B) moderate approach
C) ultra- aggressive approach
D) aggressive approach

Question 66

The matching principle is best described as:

A) assets are financed from a source having a matching maturity.
B) matching debt with equity levels.
C) total assets = (total liabilities + equity).
D) matching current assets with current liabilities.

Question 67

A moderate approach would most likely:

A) finance temporary current assets with short- term debt while permanent current assets and fixed assets are financed with long- term debt and equity.
B) finance temporary current assets and permanent assets and a small amount of long- term fixed assets with short- term debt.
C) finance permanent current assets only with short- term debt.
D) finance temporary current assets and permanent current assets with short- term debt.

Question 68

Which of the following statements is most correct?

A) The aggressive approach usually has low cost, high risk
B) The conservative approach usually has low cost, low risk
C) The aggressive approach usually has high cost, high risk
D) The moderate approach usually has low cost, low risk

Question 69

Use the following information to answer the question below.


-Calculate the level of working capital.

A) $5,000
B) $0
C) $17,000
D) $13,000

Question 70

Use the following information to answer the question below.


-Calculate the level of net working capital.

A) $5,000
B) ($1,000)
C) $17,000
D) $0

Question 71

Use the following information to answer the question below.


-Which approach best describes the method of working capital financing being used?

A) conservative approach
B) aggressive approach
C) irrational approach
D) moderate approach

Question 72

Use the following information to answer the question below.


-Calculate the amount of working capital.

A) $15,000
B) $11,000
C) $19,000
D) $35,000

Question 73

Use the following information to answer the question below.


-What is amount of net working capital?

A) $19,000
B) $35,000
C) $11,000
D) $15,000

Question 74

Use the following information to answer the question below.


-Which working capital financing approach is most probably being used?

A) aggressive approach
B) DuPont approach
C) conservative approach
D) moderate approach

Question 75

Use the following information to answer the question: Which of the following liability structures would be used in the moderate approach?

A)
B)
C)
D)

Question 76

Use the following information to answer the question: Calculate net working capital.

A) $0
B) $4,000
C) $6,000
D) ($4,000)

Question 77

An aggressive approach to working capital financing, in which the firm uses short- term debt to finance all current assets, would usually result in higher net income than a conservative approach if:

A) short- term interest rates rise.
B) long- term interest rates fall.
C) short- term interest rates fall.
D) long- term interest rates rise.

Question 78

Firms generally choose to finance temporary current assets with short- term debt because:

A) banks prefer to make so called self- liquidating loans.
B) they must do so according to GAAP
C) short- term rates tend to be more stable than long- term rates.
D) it would be impossible to get long- term debt for that purpose

Question 79

Net working capital does not include:

A) accounts payable.
B) notes payable.
C) inventory.
D) common equity.

Question 80

All else constant, which of the following would decrease net working capital?

A) a $450,000 increase in accounts payable
B) a $1,500,000 increase in inventory
C) a $750,000 cash payment to accounts receivable
D) All of the above would decrease net working capital.